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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 001-31235
INTEGRATED DEFENSE TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-4027646
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110 Wynn Drive, Huntsville, Alabama 35807
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(Address of principal executive offices) (Zip Code)
(256) 895-2000
------------------------------
(Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ___
Common stock, par value $.01 per share: 19,800,992 shares
outstanding as of August 13, 2002
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INTEGRATED DEFENSE TECHNOLOGIES, INC.
FORM 10-Q
June 30, 2002
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Balance Sheets as of June 30, 2002 and
December 31, 2001 (unaudited) 2
Consolidated Statements of Operations for the quarters
and six months ended June 30, 2002 and 2001 (unaudited) 3
Consolidated Statements of Cash Flows for the six months ended
June 30, 2002 and 2001 (unaudited) 4
Notes to Condensed Financial Statements 5 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
CERTIFICATION 25
PART I. FINANCIAL INFORMATION
ITEM 1.
INTEGRATED DEFENSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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JUNE 30, DECEMBER 31,
2002 2001
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(In thousands except share and per share amounts)
ASSETS
Current assets:
Cash $ 17,885 $ 3,893
Restricted cash 375 769
Accounts receivable, net 118,019 113,863
Income tax receivable 647 ---
Inventories, net 12,826 13,567
Prepaid expenses and other current assets 3,021 2,028
Deferred income taxes 6,437 6,645
--------------------------------------------------------------------------------
Total current assets 159,210 140,765
Property and equipment, net 44,049 45,548
Goodwill, net 83,734 83,734
Other assets 7,525 7,828
Deferred income taxes 1,320 ---
--------------------------------------------------------------------------------
Total Assets $295,838 $277,875
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit loan $ --- $ 8,500
Current portion of long-term debt 4,950 9,164
Accounts payable 15,921 14,802
Accrued compensation 9,838 8,317
Other accrued expenses 7,216 10,386
Derivative liabilities --- 5,568
Income taxes payable 660 644
Billings in excess of costs and earnings 7,505 8,743
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Total current liabilities 46,090 66,124
Long-term debt 78,813 153,561
Deferred income taxes --- 245
Pension and other postretirement employee benefits 6,222 6,675
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Total liabilities 131,125 226,605
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Contingencies (Note 11) --- ---
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Stockholders' equity:
Preferred stock, $.01 par value per share,
20,000,000 shares authorized, none issued
Common stock, $.01 par value per share,
200,000,000 shares authorized, 19,800,992
issued at June 30, 2002 and 13,565,243
issued at December 31, 2001 198 136
Additional paid-in capital 170,970 54,434
Accumulated other comprehensive loss (2,186) (5,613)
Retained earnings (deficit) (4,269) 2,313
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Total stockholders' equity 164,713 51,270
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Total Liabilities and Stockholders' Equity $295,838 $277,875
================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
INTEGRATED DEFENSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
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(In thousands except per share amounts)
Revenue $72,099 $62,618 $140,492 $121,393
Cost of revenue 49,768 44,713 98,046 85,310
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Gross profit 22,331 17,905 42,446 36,083
Selling, general and administrative expenses 9,772 9,225 19,740 17,850
Research and development and bid and proposal expenses 4,493 3,130 8,068 6,166
Amortization of debt issuance costs 192 206 399 443
Amortization of patents and goodwill 9 1,532 19 3,059
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Income from operations 7,865 3,812 14,220 8,565
Interest expense (1,027) (4,825) (4,858) (9,659)
Refinancing costs --- --- (7,571) ---
Other income 231 --- 252 ---
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Income (loss) before income taxes and extraordinary loss 7,069 (1,013) 2,043 (1,094)
Income tax expense (2,579) (229) (619) (788)
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Income (loss) before extraordinary loss 4,490 (1,242) 1,424 (1,882)
Extraordinary loss on early extinguishment of debt
(net of income tax benefit of $5,119) --- --- (8,006) ---
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Net income (loss) $ 4,490 $(1,242) $ (6,582) $ (1,882)
=========================================================================================================
Basic income (loss) per share:
Income (loss) before extraordinary loss $.23 $(.09) $ .08 $(.14)
Extraordinary loss --- --- (.45) ---
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Net income (loss) $.23 $(.09) $(.37) $(.14)
=========================================================================================================
Diluted income (loss) per share:
Income (loss) before extraordinary loss $.21 $(.09) $ .07 $(.14)
Extraordinary loss --- --- (.44) ---
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Net income (loss) $.21 $(.09) $(.37) $(.14)
=========================================================================================================
Weighted-average shares outstanding - Basic 19,801 13,565 17,837 13,565
Diluted 21,328 13,565 19,438 13,565
=========================================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
INTEGRATED DEFENSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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SIX MONTHS ENDED JUNE 30, 2002 2001
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(In thousands)
OPERATING ACTIVITIES:
Net loss $( 6,582) $(1,882)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation expense 5,393 5,243
Amortization of debt issuance costs 399 443
Amortization of goodwill and other intangible assets 110 3,059
Extraordinary loss on early extinguishment of debt, net 8,006 ---
Other refinancing costs 7,571 ---
Changes in current assets and liabilities:
Restricted cash 394 2,763
Accounts receivable, net ( 4,315) (8,324)
Inventories, net ( 144) 1,520
Other current assets ( 71) 1,993
Accounts payable 1,665 700
Billings in excess of costs and earnings ( 1,238) (4,128)
Other current liabilities ( 1,489) 2,184
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Net cash provided by operating activities 9,699 3,571
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INVESTING ACTIVITIES:
Purchases of property, plant and equipment ( 3,740) (1,653)
Capitalization of internally developed software ( 493) ---
Other ( 123) (54)
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Net cash used in investing activities ( 4,356) (1,707)
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FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of issuance costs 116,688 ---
Issuance of long-term debt 85,000 ---
Repayment of long-term debt (169,823) (3,728)
Payment of debt issuance and other refinancing costs ( 14,716) ---
Net borrowings (repayments) under revolving credit loans ( 8,500) 2,450
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Net cash provided by (used in) financing activities 8,649 (1,278)
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Net increase in cash 13,992 586
Cash at beginning of period 3,893 4,938
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Cash at end of period $ 17,885 $ 5,524
====================================================================================================
Supplemental disclosure of noncash financing activities:
Unrealized loss on derivative financial instrument $( 2,833) $(5,053)
The accompanying notes are an integral part of these consolidated
financial statements.
INTEGRATED DEFENSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements of Integrated Defense Technologies, Inc. and
subsidiaries (the "Company") have been prepared on
substantially the same basis as the Company's annual
consolidated financial statements and should be read in
conjunction with the Company's Prospectus dated February 26,
2002 filed with the Securities and Exchange Commission on
February 27, 2002 pursuant to Rule 424(b)(1) of the Securities
Act of 1933. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements contain
all adjustments (consisting of normal recurring items)
necessary for a fair presentation of results for the interim
periods presented. The consolidated results for interim
periods are not necessarily indicative of the results that may
be expected for the full year. Certain prior year amounts
have been reclassified to provide comparability with the
current year presentation.
NOTE 2: REFINANCING
On February 27, 2002, the Company completed an initial public
offering of 6,000,000 shares of common stock at $22 per share,
generating net cash proceeds of $116,688,000. The majority of
these proceeds were used for debt retirement and refinancing.
Concurrent with the closing of the offering, the Company
repaid the outstanding balances on its revolving credit and
term loan agreement and its senior subordinated notes
($125,836,000 and $51,250,000, respectively) and replaced the
previous revolving credit and term loan facility with a new
facility provided by a syndicate of financial institutions.
This new facility provides financing of up to $125,000,000,
consisting of a $40,000,000 five-year revolving credit
facility, a $40,000,000 five-year term loan, and a $45,000,000
six-year term loan. At June 30, 2002, the Company had
outstanding borrowings of $83,763,000 under the facility,
consisting of $38,875,000 under the five-year term loan and
$44,888,000 under the six-year term loan. The current
interest rates on these loans are 4.105% and 4.355%,
respectively. As of the date of this Form 10-Q filing, the
Company has not utilized the revolving credit facility.
Borrowings under the facility are secured by a pledge of
substantially all of the Company's assets and bear interest at
a base rate or LIBOR plus an applicable margin ranging from 2%
to 2.75%. Available borrowings under the revolving credit
facility are determined by the Company's borrowing base, as
defined in the agreement, which is calculated based upon
eligible accounts receivable and inventories.
The revolving credit and term loan agreement contains certain
financial covenants of the Company, including, among other
things, limitations on capital expenditures, investments, and
asset sales, and maintenance of certain financial ratios. The
Company was in compliance with these covenants at June 30,
2002.
In connection with its early retirement and refinancing of its
prior credit facility, the Company incurred one-time charges
totaling $20,696,000, including prepayment penalties, write-
offs of capitalized debt issuance costs, a write-off of the
unamortized discount on the senior subordinated notes, and
payments to terminate interest rate swap agreements associated
with the debt. The swap termination payments totaled
$7,571,000 and are reflected as "Refinancing costs" in the
Company's consolidated statement of operations for the six
months ended June 30, 2002. The remaining charges are
reflected, net of the associated tax benefit of $5,119,000, as
an "Extraordinary loss on early extinguishment of debt" in
that statement of operations.
The Company capitalized $4,589,000 of debt issuance costs
associated with the new revolving credit and term loan
agreement, consisting primarily of legal fees and a facility
fee paid to the new lenders. These costs are being amortized
on a straight-line basis over the six-year term of the
agreement. The unamortized balance at June 30, 2002 of
$4,334,000 is included in "Other assets" in the Company's
consolidated balance sheet as of that date.
NOTE 3: INVENTORIES
Inventories consist of the following:
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JUNE 30, DECEMBER 31,
2002 2001
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(In thousands)
Stock materials $10,562 $15,034
Work-in-process 3,458 2,397
Finished goods 281 458
Contracts-in-progress 5,870 3,126
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20,171 21,015
Less reserve for excess and obsolescence 7,345 7,448
------------------------------------------------------------------------
Inventories, net $12,826 $13,567
========================================================================
Stock materials, work-in-process and finished goods are stated
primarily at the lower of first-in, first-out ("FIFO") cost or
market.
Work-in-process and finished goods inventory consist primarily
of standard electronic components for use in fulfilling future
contracts.
Contracts-in-progress inventory relates to work in process
under fixed-price contracts, primarily certain contracts that
were entered into prior to August 6, 1999 for which revenue
and costs have been recognized as units have been delivered.
Accumulated contract costs include direct production and
engineering costs, factory and material handling overhead,
research and development, and general and administrative
expenses estimated to be recoverable, less the estimated
portion of such costs allocated to delivered units.
To the extent total contract costs are expected to exceed the
total estimated contract price, charges are made to current
operations to reduce contracts-in-progress inventory to
estimated realizable value.
In accordance with industry practice, contracts-in-progress
inventory includes amounts relating to programs and contracts
with long production cycles, a portion of which is not
expected to be realized within one year.
NOTE 4: PROPERTY AND EQUIPMENT
Property and equipment, net includes allowances for
depreciation of $64,484,000 and $59,832,000 at June 30, 2002
and December 31, 2001, respectively.
NOTE 5: DERIVATIVE FINANCIAL INSTRUMENTS
The Company has from time to time used interest rate swap
agreements to manage the risk associated with interest rate
fluctuations on its variable rate debt. In October 2000, the
Company entered into three such agreements with notional
amounts of $25,000,000, $10,000,000, and $60,000,000, under
which the Company paid fixed interest rates ranging from 6.39%
to 6.75% and received a variable LIBOR-based rate of interest
from the holders of the agreements. The difference in the pay
and receive rates of interest was charged or credited to
interest expense as incurred. These swap agreements increased
interest expense by $497,000 and $830,000 in the first six
months of 2001 and 2002, respectively.
On January 1, 2001, the Company adopted Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended, ("SFAS 133") which establishes
accounting and reporting standards for derivative financial
instruments, including certain derivative instruments embedded
in other contracts and for hedging activities. Upon adoption
of SFAS 133, the Company's interest rate swaps were designated
as highly effective cash flow hedges. Accordingly, the
Company recognized a one-time transition adjustment to
increase other comprehensive loss by $2,863,000 ($1,775,000
net of income tax benefit), the fair value of the interest
rate swaps at January 1, 2001, representing the approximate
cost to the Company of terminating the agreements as of that
date. In accordance with SFAS 133, this transition adjustment
was reflected as the cumulative effect of a change in
accounting principle, net of income taxes, in the Company's
other comprehensive loss for the six months ended June 30,
2001 (see Note 7). At June 30, 2001, the swap agreements had
a fair value of $4,556,000 ($2,825,000 net of tax benefit),
resulting in a component of other comprehensive loss for the
first six months of 2001 of $1,693,000 ($1,050,000 net of
income tax benefit). The approximate cost to terminate the
swaps at December 31, 2001 of $5,568,000 ($3,452,000 net of
tax benefit) is reflected as "Derivative liabilities" in the
Company's consolidated balance sheet as of that date.
On March 4, 2002, in connection with its debt retirement and
refinancing (see Note 2), the Company paid $7,571,000 to
terminate its interest rate swaps. The after tax expense for
the swap termination of $4,618,000, along with the after tax
expense of $506,000 associated with payments made during the
first quarter of 2002 prior to the termination, is reflected
in the Company's consolidated statement of operations for the
six months ended June 30, 2002.
The Company has not entered into interest rate swap agreements
in conjunction with its new revolving credit and term loan
facility.
There was no impact to earnings due to hedge ineffectiveness
during the six month periods ended June 30, 2002 or 2001. The
Company does not use derivative financial instruments for
speculative or trading purposes.
NOTE 6: INCOME (LOSS) PER SHARE
Basic income or loss per share is computed using the weighted
average number of common shares outstanding. Diluted income
or loss per share is computed using the weighted average
number of common and equivalent common shares outstanding.
Common stock warrants are the Company's only common stock
equivalent and are included in the calculation only if
dilutive.
On February 5, 2002, the Company's Board of Directors approved
a 198.6359 to 1 common stock split. All share and per share
amounts for the quarter and six months ended June 30, 2001
have been restated to reflect this stock split.
On February 27, 2002, in connection with its initial public
stock offering, the Company issued 6,000,000 additional shares
of common stock and warrant holders converted outstanding
warrants into 235,749 shares of Company common stock.
The computations of basic and diluted weighted-average shares
outstanding for the quarters and six month periods ended June
30, 2002 and 2001 are as follows.
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QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
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Weighted-average shares outstanding -- basic 19,800,992 13,565,243 17,837,248 13,565,243
Dilutive effect of warrants 1,526,946 --- 1,601,187 ---
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Weighted-average shares outstanding -- diluted 21,327,938 13,565,243 19,438,435 13,565,243
=============================================================================================================
Anti-dilutive shares were 1,762,695 for the quarter and for
the six months ended June 30, 2001.
NOTE 7: COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes net income (loss) as well
as all other nonowner changes in equity. The components of the
Company's comprehensive income (loss) for the quarters and six
month periods ended June 30, 2002 and 2001 are presented
below, net of related income tax effects. See Note 5 for
further information regarding the derivative financial
instruments used by the Company and the impact of those
derivatives on the Company's consolidated financial position
and results of operations.
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QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
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(In thousands)
Net income (loss) $4,490 $(1,242) $(6,582) $(1,882)
Other comprehensive income (loss):
Cumulative effect of change in accounting principle
with respect to derivative financial instruments --- --- --- (1,775)
Unrealized gain (loss) on derivative financial instruments --- 156 (1,672) (1,358)
Realized (gain) loss on derivative financial instruments
charged to net income (loss) --- 311 5,124 308
Minimum pension liability adjustment (46) --- ( 25) ---
------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $4,444 $( 775) $(3,155) $(4,707)
============================================================================================================
NOTE 8: SEGMENT INFORMATION
The Company's business consists of three operating
segments: Electronic Combat Systems, Diagnostics & Power
Systems, and Communications & Surveillance Systems. These
reportable segments are defined primarily by their economic
characteristics, the nature of their products and services,
and by their class of customer.
The Electronic Combat Systems segment designs, integrates,
manufactures, and sells electronics and avionics equipment
primarily to the U.S. Government for military, civil and
governmental uses, and designs, manufactures and supports
advanced test and evaluation systems, rangeless air combat
training systems, threat simulation equipment, high power
transmitters, and control subsystems for both guided bombs and
missile launching systems for the U.S. Department of Defense,
major defense prime contractors and foreign government defense
agencies.
The Diagnostics & Power Systems segment is a contractor
primarily to the U.S. Government and foreign governments, and
designs, manufactures and supports test equipment, vehicle
electronics systems and energy management systems primarily
for military combat vehicle applications.
The Communications & Surveillance Systems segment designs and
manufactures meteorological surveillance and analysis systems,
more commonly known as Doppler weather radar systems, and
designs and produces advanced electronics systems, subsystems,
components and radio transmission products for the defense,
aerospace and communications industries for U.S. and foreign
government agencies and commercial customers.
The Company evaluates performance of the operating segments
based on revenue and earnings before interest, taxes,
depreciation, and amortization ("EBITDA"), calculated as
income from operations plus depreciation and amortization.
The accounting policies of the operating segments are
consistent across segments and are the same as those used in
preparation of the consolidated financial statements of the
Company. (See Note 2 of Notes to Consolidated Financial
Statements included in the Company's Prospectus dated February
26, 2002 filed with the Securities and Exchange Commission on
February 27, 2002 pursuant to Rule 424(b)(1) of the Securities
Act of 1933.) Sales among the operating segments are
insignificant. With the exception of debt issuance cost
amortization related to the Company's new revolving credit and
term loan facility, the Company's corporate expenses are
allocated in full to the segments on the basis of relative
employment, revenue, and selected assets. Corporate assets
and expenses are included in "All other" in the following
tables.
The following table sets forth revenue and EBITDA by operating
segment for the quarters and six month periods ended June 30,
2002 and 2001.
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QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
---------------------------------------------------------------------------------------------------
(In thousands)
REVENUES FROM UNAFFILIATED CUSTOMERS:
Electronic Combat Systems $35,904 $30,911 $ 68,125 $ 61,661
Diagnostics & Power Systems 19,902 15,250 41,587 29,714
Communications & Surveillance Systems 16,253 16,218 30,485 29,565
All other 40 239 295 453
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Total $72,099 $62,618 $140,492 $121,393
===================================================================================================
OTHER FINANCIAL INFORMATION:
---------------------------------------------------------------------------------------------------
EBITDA:
Electronic Combat Systems $ 6,408 $ 6,391 $ 11,630 $ 13,228
Diagnostics & Power Systems 2,110 1,240 4,287 2,295
Communications & Surveillance Systems 2,455 505 4,524 1,764
All other (134) 12 (318) 23
---------------------------------------------------------------------------------------------------
Total $10,839 $ 8,148 $ 20,123 $ 17,310
===================================================================================================
EBITDA is not a presentation made in accordance with
accounting principles generally accepted in the United States,
and as such, it should not be considered in isolation or as a
substitute for net income (loss), cash flows from operating
activities or other income or cash flow statement data
prepared in accordance with accounting principles generally
accepted in the United States or as a measure of profitability
or liquidity. The Company monitors EBITDA by segment to
determine each segment's ability to satisfy its debt service,
capital expenditures and working capital requirements and
because certain covenants in the Company's revolving credit
and term loan facility are based upon similar measures. The
Company's EBITDA is not necessarily comparable to other
similarly titled captions used by other companies. A
reconciliation of the Company's EBITDA to income (loss) before
income taxes and extraordinary loss is presented in the table
below.
RECONCILIATION OF EBITDA TO INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY LOSS:
---------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
---------------------------------------------------------------------------------------------------
(In thousands)
EBITDA $10,839 $ 8,148 $20,123 $17,310
Less: Depreciation and amortization expense 2,974 4,336 5,903 8,745
Interest expense 1,027 4,825 4,858 9,659
Refinancing costs --- --- 7,571 ---
Add back other income 231 --- 252 ---
---------------------------------------------------------------------------------------------------
Income (loss) before income taxes and
extraordinary loss $ 7,069 $(1,013) $ 2,043 $(1,094)
===================================================================================================
The following table presents total assets for each of the
Company's operating segments as of June 30, 2002 and
December 31, 2001.
-----------------------------------------------------------------------
JUNE 30, DECEMBER 31,
2002 2001
-----------------------------------------------------------------------
(In thousands)
Total assets:
Electronic Combat Systems $145,971 $156,896
Diagnostics & Power Systems 54,815 52,056
Communications & Surveillance Systems 71,110 70,497
All other 23,942 (1,574)
-----------------------------------------------------------------------
Total $295,838 $277,875
=======================================================================
The increase in "All other" assets (essentially corporate) is
due primarily to the Company's first quarter 2002 refinancing
activities (see Note 2). Corporate assets have been
increased by the net cash generated from the Company's public
offering, by cash generated from the Company's operations
during the first six months of 2002, by capitalized debt
issuance costs, and by an increase in deferred tax assets
associated with the extraordinary loss and other refinancing
costs incurred in first quarter 2002. Prior to the first
quarter 2002 refinancing, capitalized debt issuance costs had
been allocated to the segments on a similar basis as corporate
expenses. The write-off of capitalized debt issuance costs
associated with the debt that was retired in first quarter
2002 reduced the assets of Electronic Combat Systems,
Diagnostics & Power Systems, and Communications & Surveillance
Systems by $3,100,000, $600,000, and $1,300,000, respectively.
NOTE 9: GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted the
provisions of FASB Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets ("SFAS 142"),
under which the Company's goodwill is no longer amortized and
is instead subject to annual impairment tests using a new fair
value based approach. The Company's other recorded intangible
assets, which are immaterial with respect to its consolidated
financial position and results of operations, continue to be
amortized over their estimated useful lives.
With the adoption of SFAS 142, on January 1, 2002, the
Company ceased amortization of its goodwill. The following
table presents the pro forma results of the Company for the
quarters and six month periods ended June 30, 2002 and 2001 on
a comparable basis:
-------------------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------------
(In thousands except per share amounts)
Reported income (loss) before extraordinary loss $4,490 $(1,242) $ 1,424 $(1,882)
Add back: Goodwill amortization, net of tax --- 1,258 --- 2,514
-------------------------------------------------------------------------------------------------------------
Adjusted income before extraordinary loss $4,490 $ 16 $ 1,424 $ 632
=============================================================================================================
Reported net income (loss) $4,490 $(1,242) $(6,582) $(1,882)
Add back: Goodwill amortization, net of tax --- 1,258 --- 2,514
-------------------------------------------------------------------------------------------------------------
Adjusted net income (loss) $4,490 $ 16 $(6,582) $ 632
=============================================================================================================
Basic income (loss) per share:
Reported income (loss) before extraordinary loss $.23 $(.09) $ .08 $(.14)
Goodwill amortization, net of tax --- .09 --- .19
-------------------------------------------------------------------------------------------------------------
Adjusted income before extraordinary loss $.23 $ --- $ .08 $ .05
=============================================================================================================
Reported net income (loss) $.23 $(.09) $(.37) $(.14)
Goodwill amortization, net of tax --- .09 --- .19
-------------------------------------------------------------------------------------------------------------
Adjusted net income (loss) $.23 $ --- $(.37) $ .05
=============================================================================================================
Diluted income (loss) per share:
Reported income (loss) before extraordinary loss $.21 $(.09) $ .07 $(.14)
Goodwill amortization, net of tax --- .09 --- .18
-------------------------------------------------------------------------------------------------------------
Adjusted income before extraordinary loss $.21 $ --- $ .07 $ .04
=============================================================================================================
Reported net income (loss) $.21 $(.09) $(.37) $(.14)
Goodwill amortization, net of tax --- .09 --- .18
-------------------------------------------------------------------------------------------------------------
Adjusted net income (loss) $.21 $ --- $(.37) $ .04
=============================================================================================================
For impairment testing purposes, the Company determined the
value of its individual business units using a discounted
cash flow model, a guideline company model, and a transaction
model, and by observation of demonstrable fair values of
comparable entities. The Company has determined that there
is no impairment of its goodwill as of the January 1, 2002
implementation date of SFAS 142.
NOTE 10: RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, the Company adopted FASB Statement
of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144").
SFAS 144 establishes a single accounting model for long-lived
assets to be disposed of by sale. The adoption of SFAS 144 did
not have a material effect on the Company's consolidated
operating results or financial position.
In June 2001, the FASB issued Statement of Financial
Accounting Standards No. 143, Accounting for Asset Retirement
Obligations ("SFAS 143"), which addresses financial accounting
and reporting for obligations associated with the retirement
of tangible long-lived assets and associated asset retirement
costs and requires that the fair value of a liability for an
asset retirement obligation be recorded in the period in which
it is incurred. SFAS 143 will become effective for the Company
in 2003, and management is currently evaluating the impact, if
any, that SFAS 143 will have on its consolidated financial
statements.
NOTE 11: CONTINGENCIES
As further described in the Company's Prospectus dated
February 26, 2002 filed with the Securities and Exchange
Commission on February 27, 2002 pursuant to Rule 424(b)(1) of
the Securities Act of 1933, the Company is involved in various
legal actions arising in the normal course of its business,
including a National Park Service investigation regarding the
presence of residual radioactive materials and contamination
at a uranium mine previously owned by a predecessor of one of
the Company's subsidiaries. Although the ultimate costs of
these matters cannot be predicted with certainty, the outcomes
of such legal actions are not expected, either individually or
in the aggregate, to result in a material adverse effect on
the Company's business, results of operations, or financial
condition. There were no material developments with respect
to these matters during the first six months of 2002.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Integrated Defense Technologies, Inc. (the "Company") is a
designer and developer of advanced electronics and technology
products to the defense and intelligence industries. The Company's
products are installed on or used in support of a broad array of
military platforms in order to enhance their operational performance
or extend their useful life. The Company's customers include all
branches of the military services, major domestic prime defense
contractors such as The Boeing Company, General Dynamics
Corporation, Lockheed Martin Corporation, Northrop Grumman
Corporation, Raytheon Company and United Defense Industries, Inc.,
foreign defense contractors, foreign governments and U.S. Government
agencies.
The Company's contracts typically fall into two categories:
cost-plus and fixed-price contracts. Contracts for research,
engineering, prototypes, and repair and maintenance are typically
cost-plus arrangements. Customer-funded research and development
costs are typically included in the Company's contracts and booked
as revenue and cost of revenue.
In a fixed-price contract, the price is not subject to
adjustment based on cost incurred to perform the required work under
the contract. In a cost-plus contract, the Company is reimbursed for
allowable incurred costs plus a fee, which may be fixed or variable.
The price on a cost-plus contract is based on allowable cost
incurred, but generally is subject to contract funding limitations.
Under fixed-price contracts the Company agrees to perform for a
predetermined contract price. Although fixed-price contracts
generally permit the Company to keep profits if costs are less than
projected, the Company bears the risk that increased or unexpected
costs may reduce profit or cause the Company to sustain losses on
the contracts. Generally, fixed-price contracts offer higher margins
than cost-plus type contracts.
All of the Company's domestic U.S. Government contracts and
subcontracts are subject to audit and various cost controls and
include standard provisions for termination at the convenience of
the U.S. Government. The Department of Defense generally has the
right to object to the costs as not allowable or as unreasonable,
which can increase the level of costs the Company bears. Multi-year
U.S. Government contracts and related orders are subject to
cancellation if funds for contract performance for any subsequent
year are not available. Foreign government contracts generally
include comparable provisions relating to termination at the
convenience of the foreign government.
The Company uses the percentage-of-completion method of
accounting for fixed-price and cost-plus contracts and, therefore,
matches revenue with the cost incurred on each unit produced at the
time the Company recognizes its sale based on the estimate of gross
profit margin the Company expects to receive over the life of the
contract. The Company currently evaluates its estimates of gross
margin on a monthly basis. In addition, the Company uses the
cumulative catch-up method to recognize its changes in estimates of
sales and gross margins during the period in which those changes are
determined. The Company charges any anticipated losses on a contract
to operations as soon as those losses are determined. The principal
components of the Company's contract cost of revenue are materials,
subcontractor costs, labor and overhead. The Company charges all of
these costs to the respective contracts as incurred.
The Company expenses operating costs such as selling, general
and administrative, independent research and development costs and
bid and proposal costs in the period incurred. The major components
of these costs are compensation and overhead. Capitalized debt
issuance costs, software development costs and patents are amortized
over their useful lives, with the amortization of capitalized
software development costs included as a component of the Company's
cost of revenue. Since January 1, 2002, the Company has been subject
to a new accounting standard under which it no longer amortizes
goodwill, although it must test its goodwill periodically for
impairment.
The Company's results of operations, particularly its revenue
and gross profits, and its cash flows may vary significantly from
period to period depending upon the timing of delivery of finished
products, the terms of contracts and the level of export sales. As a
result, period-to-period comparisons may show substantial changes
disproportionate to the Company's underlying business activity.
Accordingly, the Company does not believe that its quarterly results
of operations are necessarily indicative of results for future
periods.
FORWARD LOOKING STATEMENTS
The information contained in this report, other than historical
information, includes forward-looking statements, including in
particular statements about plans, strategies and prospects under
the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Words such as "may," "will,"
"expect," "anticipate," "believe," "estimate," "plan," "intend" and
similar expressions in this report identify forward-looking
statements. These forward-looking statements are based on current
views with respect to future events and financial performance.
Actual results could differ materially from those projected in the
forward-looking statements.
The Company's forward-looking statements are subject to risks
and uncertainties, including:
o the Company's dependence on the defense industry and
the business risks peculiar to that industry,
including changing priorities or reductions in the
U.S. Government defense budget;
o the Company's ability to obtain future government
contracts on a timely basis;
o the availability of government funding and customer
requirements;
o the potential development of new and competing
technologies and the Company's ability to compete
technologically; and
o general economic conditions, the competitive
environment of the defense industry, international
business and political conditions and timing of
awards and contracts.
As for the forward-looking statements that relate to future
financial results and other projections, actual results could be
different due to the inherent uncertainty of estimates, forecasts
and projections and may be better or worse than anticipated. Given
these uncertainties, you should not place any reliance on forward-
looking statements. Forward-looking statements represent the
Company's estimates and assumptions only as of the date they were
made. The Company expressly disclaims any duty to provide updates to
forward-looking statements and the estimates and assumptions
associated with them, except to the extent required by applicable
securities laws.
RESULTS OF OPERATIONS
The following tables summarize the Company's operating
information as a percentage of revenue and its segment data for the
quarters and six month periods ended June 30, 2002 and 2001:
-------------------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS AND OTHER FINANCIAL INFORMATION:
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 69.0 71.4 69.8 70.3
-------------------------------------------------------------------------------------------------------------
Gross profit 31.0 28.6 30.2 29.7
Selling, general and administrative expenses 13.6 14.7 14.1 14.7
Research and development and bid and proposal expenses 6.2 5.0 5.7 5.1
Amortization of patents, debt issuance costs and goodwill .3 2.8 .3 2.9
-------------------------------------------------------------------------------------------------------------
Income from operations 10.9% 6.1% 10.1% 7.0%
=============================================================================================================
EBITDA (1) 15.0% 13.0% 14.3% 14.3%
=============================================================================================================
OPERATIONS INFORMATION BY SEGMENT AND OTHER FINANCIAL INFORMATION:
(In millions)
Revenue:
Electronic Combat Systems $35.9 $30.9 $ 68.1 $ 61.7
Diagnostics & Power Systems 19.9 15.3 41.6 29.7
Communications & Surveillance Systems 16.3 16.2 30.5 29.6
Other --- .2 .3 .4
-------------------------------------------------------------------------------------------------------------
Total revenue $72.1 $62.6 $140.5 $121.4
=============================================================================================================
Gross profit:
Electronic Combat Systems $12.1 $ 9.5 $22.2 $20.1
Diagnostics & Power Systems 4.7 3.1 9.1 5.9
Communications & Surveillance Systems 5.5 5.1 11.0 9.8
Other --- .2 .1 .3
-------------------------------------------------------------------------------------------------------------
Total gross profit $22.3 $17.9 $42.4 $36.1
=============================================================================================================
EBITDA (1) :
Electronic Combat Systems $ 6.4 $6.4 $11.6 $13.2
Diagnostics & Power Systems 2.1 1.2 4.3 2.3
Communications & Surveillance Systems 2.5 .5 4.5 1.8
Other (.2) --- (.3) ---
-------------------------------------------------------------------------------------------------------------
Total EBITDA $10.8 $8.1 $20.1 $17.3
=============================================================================================================
(1) The Company's EBITDA represents income from operations plus
depreciation and amortization. EBITDA is not a presentation
made in accordance with accounting principles generally accepted
in the United States, and as such, it should not be considered
in isolation or as a substitute for net income (loss), cash
flows from operating activities or other income or cash flow
statement data prepared in accordance with accounting principles
generally accepted in the United States or as a measure of
profitability or liquidity. The Company monitors EBITDA by
segment to determine each segment's ability to satisfy its
debt service, capital expenditure and working capital
requirements and because certain covenants in the Company's
revolving credit and term loan facility are based upon similar
measures. The Company's EBITDA is not necessarily comparable
to other similarly titled captions used by other companies.
RESULTS OF OPERATIONS. In second quarter 2002, the Company
earned net income of $4.5 million on revenues of $72.1 million,
compared to a first quarter 2002 net loss of $11.1 million on
revenues of $68.4 million and a second quarter 2001 net loss of $1.2
million on revenues of $62.6 million. For the first half of 2002,
the Company incurred a net loss of $6.6 million on revenues of
$140.5 million, compared to a first half 2001 net loss of $1.9
million on revenues of $121.4 million.
On February 27, 2002, the Company completed an initial public
offering of 6 million shares of common stock at $22 per share,
generating net cash proceeds of approximately $116.7 million. The
majority of these proceeds were used for debt retirement and
refinancing. Concurrent with the closing of the offering, the
Company repaid the outstanding balances on its revolving credit and
term loan agreement and its senior subordinated notes, and replaced
the previous revolving credit and term loan facility with a new
facility provided by a syndicate of financial institutions. See
"Liquidity and Capital Resources" following for further discussion
of the debt refinancing, as well as of terms and covenants
associated with the new revolving credit and term loan facility.
The Company incurred charges related to its early debt
retirement and refinancing totaling $20.7 million, including
prepayment penalties, write-offs of capitalized debt issuance costs,
a write-off of unamortized discount on its senior subordinated
notes, and payments to terminate interest rate swaps associated with
its revolving credit and term loan facility. The swap termination
payments totaled approximately $7.6 million and are reflected as
"Refinancing costs" in the Company's consolidated statement of
operations for the first six months of 2002. The remaining costs
are reflected, net of the associated tax benefit of $5.1 million, as
an "Extraordinary loss on early extinguishment of debt" in the
consolidated statement of operations for that period. The Company's
net losses for the first quarter and first half of 2002 were
primarily the result of these charges, which totaled approximately
$12.6 million net of the associated tax benefits.
PRO FORMA RESULTS OF OPERATIONS. Excluding the impact on
earnings of these debt retirement and refinancing charges, the
Company earned a pro forma net income in the first six months of
2002 of $6 million, compared to a net loss of $1.9 million in the
same prior year period. Approximately $2.5 million of the
improvement from the prior year period was the result of adoption of
the goodwill amortization provisions of SFAS 142 effective January
1, 2002. (See Note 9 of Notes to Consolidated Financial Statements
contained in this Form 10-Q.) The remainder of the improvement was
due primarily to a 16% revenue increase and a decline in interest
expense as the result of the Company's debt refinancing, partially
offset by a 16% increase in operating expenses.
REVENUE. Revenue for second quarter 2002 was $72.1 million,
up 5% from the first quarter 2002 level and up 15% from the same
prior year period. Year to date revenues are $140.5 million, up 16%
from the first six months of 2001.
The Company's Electronic Combat Systems segment earned revenues
of $35.9 million in second quarter 2002, up 11% and 16%,
respectively, from the first quarter 2002 and second quarter 2001
levels. Year to date revenues were $68.1 million, up 10% from the
first half 2001 level. The increase in revenue from the prior year
periods was primarily the result of strong bookings in fourth
quarter 2001 and in the first half of 2002, including a large fourth
quarter 2001 order from the U.S. Navy Fiber Optics Data Management
System program. A delay in an order from the Air Force P4RC
programs shifted revenues from the first quarter of 2002 into the
current quarter.
Revenues for the Company's Diagnostics & Power Systems segment
were $19.9 million for the quarter, down 8% from the first quarter
2002 level but up 31% from the same prior year period. Year to date
revenues were $41.6 million, up 40% from the first half 2001 level.
The Diagnostics & Power Systems segment had a very strong first
quarter due to strong fourth quarter 2001 orders for embedded
diagnostics, additions to the scope of the Abrams Systems Technical
Support program, and earlier than expected booking of the Common
Support Function Module program. Revenues for this segment continue
to be strong as the result of these programs and as a result of an
early contract award for the 10th Year Power Supplies and Displays
program. The decline in revenue from the first quarter 2002 level
was due to lower revenue for embedded diagnostics programs.
Revenues for the Company's Communications & Surveillance
Systems segment were $16.3 million, flat with the same prior year
period, but up 14% from the first quarter 2002 level. Year to date
revenues were $30.5 million, up 3% from the first half 2001 level.
Current year revenues have been less than expected due to the first
quarter loss of a weather radar system booking in Turkey. However,
bookings for the segment improved toward the end of the first
quarter, and in second quarter the first phase of the segment's
largest program was completed and shipped.
GROSS PROFIT. The Company's gross profit for second quarter
was $22.3 million, up from $20.1 million in first quarter 2002 and
$17.9 million in second quarter 2001. The dollar increase in gross
profit resulted primarily from the Company's increased revenues,
primarily in its Electronic Combat Systems segment. As a percentage
of revenue, gross profit for the quarter was 31%, up from 29.4% in
first quarter 2002 and 28.6% in the same prior year period. Margin
improvements were realized in all of the Company's operating
segments, due primarily to improved program performance and to the
Company's ongoing efforts to reduce costs.
The Company's gross profit for first half 2002 was $42.4
million, up from $36.1 million in first half 2001, due to across the
board revenue increases in the Company's operating segments. As a
percentage of revenue, gross profit increased from 29.7% in first
half 2001 to 30.2% in the current year period. The largest revenue
increase from the prior year occurred in the Company's Diagnostics &
Power Systems segment, which has a higher proportion of cost-plus
business than the other segments. As such, its margins will
generally be lower, and may limit improvement in the consolidated
margin percentage in periods of increased Diagnostics revenue
relative to total revenue. Other factors impacting first half 2002
margin included start-up production costs resulting from continued
investment in the hybrid electric business and in the Sidecar
program by Diagnostics & Power Systems, and temporary cost and
volume issues in the Electronic Combat Systems segment. However,
these negative factors were more than offset by the benefits
resulting from the Company's periodic downsizing and continuing cost
control efforts, primarily in its Communications & Surveillance
Systems segment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's
selling, general and administrative expenses for second quarter 2002
were $9.8 million, down 2% from the first quarter 2002 level and up
6% from the same prior year period. Expenses for first half 2002
were $19.7 million, up 11% from the first half 2001 level. The
increase from prior year levels resulted primarily from additional
administrative expenses associated with operating as a publicly-held
company. Second quarter 2002 expenses were down from the first
quarter 2002 level due primarily to cost reduction efforts in the
Company's Communications & Surveillance Systems segment and to a
reduction in the segment's commission expenses. Commission expenses
are generally higher on international jobs and will vary from
quarter to quarter with the mix of international revenues to total
revenues.
With respect to the Company's segments, Electronic Combat
Systems' and Diagnostics & Power Systems' year to date expenses have
increased by $1.9 million and $.6 million, respectively, while
Communications & Surveillance Systems' expenses have declined by $1
million from the prior year period. The expense decline resulting
from the segment's fourth quarter 2001 staff reductions and ongoing
cost reductions efforts have served to offset additional corporate
expenses, primarily public company expenses, allocated to the
segment.
As a percentage of revenue, selling, general, and
administrative expenses continue to decline. Second quarter 2002
expenses were 13.6% of revenue, down from 14.6% in first quarter
2002 and 14.7% in second quarter 2001. Year to date expenses have
declined from 14.7% in first half 2001 to 14.1% in the current year
period. The Company has an aggressive cost-cutting plan which was
put into effect in second quarter 2002, primarily related to its
general and administrative expenses. Though the plan had little
impact on second quarter expenses, it is anticipated that additional
improvements will be realized in the second half of 2002.
RESEARCH AND DEVELOPMENT AND BID AND PROPOSAL EXPENSES. The
Company's research and development and bid and proposal expenses
were $4.5 million for second quarter 2002, up 26% from the first
quarter 2002 level and up 44% from the same prior year period. As a
percentage of revenue, research and development and bid and proposal
expenses were 6.2% for the quarter, up from 5.2% in first quarter
2002 and 5% in second quarter 2001. The expense increase in second
quarter was due primarily to an acceleration of bid and proposal
expenses of approximately $.6 million in an effort to win bookings
on several large forthcoming projects. These expenses are expected
to decline to more normal levels in the second half of the year
as many of the major proposals have now been submitted. Research
and development efforts also increased in the second quarter as
programs were accelerated to support potential new products.
Year to date research and development and bid and proposal
expenses were $8.1 million, up 31% from the first half 2001 level.
As a percentage of revenue, research and development and bid and
proposal expenses increased from 5.1% in first half 2001 to 5.7% in
the current year period. Electronic Combat Systems' and Diagnostics
& Power Systems' expenses increased by $1.8 million and $.6 million,
respectively, while Communications & Surveillance Systems' expenses
declined by $.4 million from the prior year period. Cost
containment achieved in this segment has served to offset the
additional expenses associated with increased research and
development and program proposal efforts.
AMORTIZATION OF PATENTS, DEBT ISSUANCE COSTS AND GOODWILL.
The Company's amortization expense, excluding amounts
included in cost of revenue for amortization of its internally
developed software, was $.2 million and $.4 million, respectively,
in the second quarter and first half of 2002, significantly down
from the prior year periods. The Company ceased amortization of
its goodwill on January 1, 2002 in accordance with the provisions
of SFAS 142. See Note 9 of Notes to Consolidated Financial
Statements contained in this Form 10-Q for a pro forma presentation
of second quarter and first half 2001 results of operations
excluding goodwill amortization.
INCOME FROM OPERATIONS. The Company's income from operations
was $7.9 million or 10.9% of revenue for second quarter 2002, up
from $6.4 million or 9.3% of revenue in first quarter 2002, and up
from $3.8 million or 6.1% of revenue for second quarter 2001. Year
to date, the Company's income from operations was $14.2 million or
10.1% of revenue, up from $8.6 million or 7% of revenue for first
half 2001.
Communications & Surveillance Systems' operating results
improved from an operating loss of $.3 million in second quarter
2001 to an operating income of $2 million in second quarter 2002.
Year to date, the segment's income from operations was $3.5 million,
compared to breakeven results in first half 2001. The improvement
from the prior year levels is due primarily to the positive results
of the segment's downsizing and cost control efforts as well as to
the lack of goodwill amortization expense in 2002.
Diagnostics & Power Systems' operating income for the second
quarter and first half of 2002 was $1.7 million and $3.4 million,
respectively, up by approximately $1.3 million and $2.8 million,
respectively, from the comparable prior year levels. Electronic
Combat Systems' operating income for the second quarter and first
half of 2002 was $4.6 million and $7.9 million, respectively, up by
approximately $1.2 million and $.6 million, respectively, from the
same prior year periods. The current year improvement in both
segments' operating results was primarily the result of increased
volume, improved gross margins, and lack of goodwill amortization in
2002, partially offset by the increased operating expenses described
previously.
INTEREST EXPENSE. The Company's interest expense for the
second quarter and first half of 2002 was $1 million and $4.9
million, respectively, down $3.8 million and $4.8 million,
respectively, from the comparable prior year levels. The interest
expense decline is due primarily to the reduction in debt achieved
through the Company's first quarter 2002 refinancing. In addition,
average LIBOR rates have declined by approximately 2.7 points from
the first half 2001 level.
INCOME TAX EXPENSE. The Company recorded income tax expense
of $2.6 million, or 36.5% of pretax income, in second quarter 2002
and an income tax benefit of $4.5 million (including extraordinary
item), or 40.6% of pretax loss, year to date. In the second
quarter and first half of 2001, the Company recorded income tax
expense of $.2 million and $.8 million, respectively, on pretax
losses of $1 million and $1.1 million, respectively. The Company's
effective income tax rates exceeded the U.S. federal statutory rates
in all periods due primarily to non-deductible expenses, including
goodwill amortization in 2001.
EBITDA. The Company's EBITDA was $10.8 million, or 15% of
revenue, for second quarter 2002, up from $9.3 million, or 14% of
revenue, in first quarter 2002 and $8.1 million, or 13% of revenue,
in second quarter 2001. Year to date, the Company's EBITDA was
$20.1 million, up from $17.3 million for first half 2001. As a
percentage of revenue, year to date EBITDA was flat with the prior
year at 14%.
Communications & Surveillance Systems' EBITDA for the second
quarter and first half of 2002 was $2.5 million and $4.5 million,
respectively, up $2 million and $2.8 million, respectively, from the
comparable prior year periods. The improvement from the prior year
levels is due primarily to the positive results of the segment's
downsizing and cost control efforts.
Diagnostics & Power Systems' EBITDA for the second quarter and
first half of 2002 was $2.1 million and $4.3 million, respectively,
up $.9 million and $2 million, respectively, from the comparable
prior year periods. The current year improvement was primarily the
result of increased volume and improved gross margins, partially
offset by increased operating expenses.
Electronic Combat Systems' EBITDA for the second quarter and
first half of 2002 was $6.4 million and $11.6 million,
respectively. The segment's second quarter EBITDA was flat with the
comparable prior year period, while its first half EBITDA declined
by $1.6 million from the first half of 2001 as the negative effects
of the segment's increased operating expenses was only partially
offset by its improved revenues and gross margin.
LIQUIDITY AND CAPITAL RESOURCES
In the first six months of 2002 the Company generated cash of
$14 million, primarily from its operations and from the net proceeds
of its initial public offering and debt refinancing, compared to a
net cash generation of $.6 million in first six months of 2001. Cash
provided by operations totaled $9.7 million in first half 2002,
compared to $3.6 million in first half 2001.
Capital expenditures in the first half of 2002 were
$3.7 million, up $2.1 million from first half 2001. The Company's
capital expenditures consist primarily of purchases of test
equipment, office equipment and building and leasehold improvements.
Due to the nature of the Company's business, capital expenditures
have historically not been substantial. The Company expects that its
total capital expenditures for 2002 will be within the range of $6
to $8 million.
On February 27, 2002, the Company completed an initial public
offering of 6 million shares of common stock at $22 per share,
generating net cash proceeds of approximately $116.7 million.
Concurrent with the closing of the offering, the Company repaid the
outstanding balances on its revolving credit and term loan agreement
and its senior subordinated notes ($125.8 million and $51.3 million,
respectively) and replaced the previous revolving credit and term
loan facility with a new facility provided by a syndicate of
financial institutions. This new facility provides financing of up
to $125 million, consisting of a $40 million five-year revolving
credit facility, a $40 million five-year term loan, and a $45
million six-year term loan. Borrowings under the facility are
secured by a pledge of substantially all of the Company's assets and
bear interest at a base rate or LIBOR plus an applicable margin
ranging from 2% to 2.75%. Available borrowings under the revolving
credit facility are determined by the Company's borrowing base, as
defined in the agreement, which is calculated based upon eligible
accounts receivable and inventories. At June 30, 2002, the Company
had outstanding borrowings of $83.8 million under the facility,
consisting of $38.9 million under the five-year term loan and $44.9
million under the six-year term loan. The current interest rates
on these loans are 4.105% and 4.355%, respectively. As of the date
of this Form 10-Q filing, the Company has not utilized the revolving
credit facility.
In connection with the refinancing of its debt, the Company
paid approximately $10.1 million in refinancing costs, primarily for
prepayment penalties and swap termination costs (see "Results of
Operations" above) and capitalized $4.6 million of debt issuance
costs associated with the new revolving credit and term loan
agreement, consisting primarily of legal fees and a facility fee
paid to the new lenders.
The revolving credit and term loan agreement contains certain
financial covenants of the Company including, among other things,
limitations on capital expenditures, investments, and asset sales,
and maintenance of certain financial ratios. The Company was in
compliance with these covenants at June 30, 2002.
Historically, the Company's primary source of liquidity has
been cash provided by operations, derived from net income plus
depreciation and amortization and plus or minus net investments in
working capital from period to period. The Company's liquidity
position is dependent on a number of factors, including the timing
of production and delivery on sales contracts and the timing of
billing and collection activity. Purchase of materials for
production and payment for labor and overhead expenses can represent
significant advance expenditures, and billing to and collection from
customers can lag those expenditures significantly on some longer-
term customer contracts. The Company's billing arrangements include
(a) monthly progress payments (typically on fixed-price contracts)
in which customers are billed 80% of incurred cost plus general and
administrative expenses but without profit, (b) monthly billing in
full at cost incurred plus profit (typically on cost-plus
contracts), (c) periodic milestone achievement-based billing at cost
incurred plus profit, and (d) billing at final delivery at cost
incurred plus profit. Fixed-price contracts, some milestone-based
billing contracts, and bill-at-delivery contracts represent a
significant required use of working capital for the Company that
must be funded by operations or through external sources.
The Company's liquidity and ability to generate cash improved
significantly during second quarter 2002, and the Company
anticipates continued improvement in its operating cash flows
throughout the remainder of the year as the receivables built up in
the first half of the year are collected and as the Company
continues to focus on reducing its investment in unbilled
receivables. Based on its current level of operations and
anticipated growth, the Company believes that cash proceeds from the
initial public offering and cash from operations and other available
sources of liquidity, including borrowings under the new revolving
credit and term loan facility, will be sufficient to fund its
operations for at least the next two years. The Company does not
anticipate any significant nonoperating events that will require the
use of cash, other than potential acquisitions of companies which
are a match for existing and potential products and business.
Though the Company is continuously evaluating such opportunities, as
of the date of this Form 10-Q filing, it does not have any
definitive acquisition negotiations in process.
BACKLOG
The Company defines backlog as the value of contract awards
received from customers which have not been recognized as sales.
Funded backlog refers to contract awards for which the Company has
received orders and the customer has obligated funds. Unfunded
backlog consists of potential product orders relating to existing
customer contracts that are the subject of customer options for
additional products or potential orders under existing contracts
that receive annual or incremental funding. A significant portion of
sales are to prime contractors, the Department of Defense, and
foreign governments pursuant to long-term contracts. Accordingly,
the backlog consists in large part of orders under these contracts.
As of June 30, 2002, funded backlog was $235.3 million and total
backlog was $389 million. The Company generally expects to ship and
recognize revenue on approximately 90% of the dollar value of its
funded backlog within a twelve month period from a given point in
time.
The following depicts the Company's backlog of orders by
business segment at June 30, 2002 and December 31, 2001:
---------------------------------------------------------------------------------------------
FUNDED UNFUNDED
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
2002 2001 2002 2001
---------------------------------------------------------------------------------------------
(In millions)
Electronic Combat Systems $131.9 $125.8 $147.3 $160.6
Diagnostics & Power Systems 61.9 51.7 3.7 1.5
Communications & Surveillance Systems 41.5 43.9 2.7 8.8
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Total Backlog $235.3 $221.4 $153.7 $170.9
=============================================================================================
While it is expected that a substantial portion of funded
backlog will be converted to revenue during 2002, the Company cannot
provide assurance that the backlog, both funded and unfunded, will
become revenue in any particular period, if at all.
The Company's second quarter and first half 2002 bookings were
less than anticipated as approximately $15 million in bookings that
were expected in late June were not received until July. Uncertain
timing of bookings is typical in the industry in which the Company
conducts business.
RELATED PARTY TRANSACTIONS
The Company pays Veritas Capital Management, L.L.C. ("Veritas")
an annual management fee. Veritas controls our principal
stockholder, IDT Holding, L.L.C. The Company paid $450,000 in
management fees to Veritas in both first half 2001 and 2002. The
Company was not indebted to its principal stockholder or to Veritas
at June 30, 2002 or December 31, 2001. In addition, in connection
with the Company's initial public offering on February 27, 2002, the
Company paid a transaction advisory fee to The Veritas Capital Fund,
L.P. in the amount of $1,500,000. Robert McKeon and Thomas
Campbell, the Chairman and a member of the Board of Directors,
respectively, are managing members of Veritas.
William G. Tobin, a member of the Board of Directors and audit
committee, is a Managing Director and Chairman of the Defense and
Aerospace practice of Korn/Ferry International, an executive search
firm. The Company has contracted with Korn/Ferry to handle its
search for a Chief Operating Officer. During the six months ended
June 30, 2002, the Company made installment payments to Korn/Ferry
totaling approximately $146,000.
Edward N. Ney, a member of the Board of Directors and audit
committee, is Chairman Emeritus of Young & Rubicam, an advertising
firm for which he previously served as President and Chief Executive
Officer. The Company has contracted with Burson-Marsteller, an
affiliate of Young & Rubicam, to manage its investor relations and
public relations functions. During the six months ended June 30,
2002, the Company made payments to Burson-Marsteller totaling
approximately $145,000.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and
Results of Operations is based upon the Company's consolidated
financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The
preparation of these financial statements requires management to
make estimates and assumptions which affect the amounts reported in
the financial statements and determine whether contingent assets and
liabilities, if any, are disclosed in the financial statements. On
an ongoing basis, the Company evaluates its estimates and
assumptions, including those related to long-term contracts, product
returns and warranty obligations, bad debts, inventories, the
recoverability of goodwill and other intangible assets, fixed asset
lives, income taxes, self-insurance reserves, pensions and other
post-retirement benefits, environmental matters, litigation and
other contingencies. The Company bases its estimates and
assumptions on historical experience and on various other factors
that are believed to be reasonable under the circumstances,
including current and expected economic conditions, the results of
which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other
sources. Actual results may differ materially from the Company's
estimates under different assumptions or conditions.
The Company believes the following critical accounting
policies, among others, affect its more significant estimates and
assumptions used in the preparation of its consolidated financial
statements:
REVENUE RECOGNITION. The Company recognizes revenue and profit
on substantially all of its contracts using the percentage-of-
completion method of accounting, which relies on estimates of total
expected contract revenues and costs. The Company follows this
method since reasonably dependable estimates of the revenues and
costs applicable to various stages of the contracts can be made.
Recognized revenues and profit are subject to revisions as the
projects progress to completion. Revisions to the Company's profit
estimates are charged to income in the period in which the facts
that give rise to the revisions become known. Although the Company
makes provisions for losses on its contracts in its financial
statements, it cannot provide assurance that such contract loss
provisions, which are based on estimates, will be adequate to cover
all future losses or that it will not be required to restate prior
period quarterly or annual financial statements as the result of
errors in its estimates.
GOODWILL. The Company has in its June 30, 2002 consolidated
balance sheet a goodwill asset in the amount of $83.7 million. In
connection with the adoption of SFAS 142, the Company performs
periodic impairment tests of its goodwill. The process of
evaluating goodwill for impairment involves the determination of the
fair value of the Company's business units. Inherent in such fair
value determinations are certain judgments and estimates, including
the interpretation of current economic indicators and market
valuations, and assumptions about the Company's strategic plans with
regard to its operations. To the extent additional information
arises or the Company's strategies change, it is possible that the
Company's conclusions regarding goodwill impairment could change and
result in a material effect on its financial position or results of
operations.
INVENTORY. The Company writes down its inventory for estimated
obsolescence or unmarketable items in an amount equal to the
difference between the cost of inventory and its estimated market
value based upon assumptions about future demand and market
conditions. If actual future demand or market conditions are less
favorable than those projected by management, additional inventory
write-downs may be required.
INSURANCE. The Company records cost estimates for certain
health and welfare and workers' compensation and casualty insurance
plans that are partially self-insured by the Company. Should actual
claims exceed the estimates or should medical costs in general
increase beyond the estimates, reserves recorded may not be
sufficient and adverse effects on the consolidated financial
statements could occur.
CONTINGENCIES. As discussed in the Company's Prospectus dated
February 26, 2002 filed with the Securities and Exchange Commission
on February 27, 2002 pursuant to Rule 424(b)(1) of the Securities
Act of 1933, the Company is involved in various legal actions
arising in the normal course of its business, including a National
Park Service investigation regarding the presence of residual
radioactive materials and contamination at a uranium mine previously
owned by a predecessor of one of the Company's subsidiaries. The
outcomes of such legal actions are not expected, either individually
or in the aggregate, to result in a material adverse effect on the
Company's business, results of operations, or financial condition.
It is possible, however, that future results of operations for any
particular quarterly or annual period could be materially affected
by changes in the Company's assumptions related to these
proceedings. The Company accrues its best estimate of the probable
cost for the resolution of legal claims. Such estimates are
developed in consultation with outside counsel handling these
matters and are based upon a combination of litigation and
settlement strategies. To the extent additional information arises
or the Company's strategies change, it is possible that the
Company's best estimate of its liability in these matters, if any,
may change.
The above listing is not intended to be a comprehensive list of
all of the Company's accounting policies. In many cases, the
accounting treatment of a particular transaction is specifically
dictated by accounting principles generally accepted in the United
States, with no need for management's judgment of their application.
There are also areas in which management's judgment in selecting an
available alternative would not produce a materially different
result. See the Company's audited financial statements and notes
thereto contained in its Prospectus dated February 26, 2002 filed
with the Securities and Exchange Commission on February 27, 2002
pursuant to Rule 424(b)(1) of the Securities Act of 1933 for a
discussion of the Company's accounting policies and other
disclosures required by accounting principles generally accepted in
the United States.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, the Company adopted the goodwill
amortization provisions of FASB Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS
142"), under which the Company's goodwill is no longer being
amortized and is instead subject to annual impairment tests using a
new fair value based approach. The Company's other recorded
intangible assets, which are immaterial with respect to its
financial position and results of operations, continue to be
amortized over their estimated useful lives.
For impairment testing purposes, the Company determined the
value of its reporting units using a discounted cash flow model, a
guideline company model, and a transaction model, and by observation
of demonstrable fair values of comparable entities. The Company has
determined that there is no impairment of its goodwill as of the
January 1, 2002 implementation date of SFAS 142.
Effective January 1, 2002, the Company adopted FASB Statement
of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144
establishes a single accounting model for long-lived assets to be
disposed of by sale. The adoption of SFAS 144 did not have a
material effect on the Company's consolidated operating results or
financial position.
In June 2001, the FASB issued Statement of Financial
Accounting Standards No. 143, Accounting for Asset Retirement
Obligations ("SFAS 143"), which addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and associated asset retirement costs and requires
that the fair value of a liability for an asset retirement
obligation be recorded in the period in which it is incurred. SFAS
143 will become effective for the Company in 2003, and management is
currently evaluating the impact, if any, that SFAS 143 will have on
its consolidated financial statements.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to potential increases in interest rates
on its variable rate debt under its new revolving credit and term
loan agreement. The Company does not currently have interest rate
swap agreements in place to mitigate this interest rate risk as it
did with its previous variable rate debt.
To illustrate the sensitivity of the Company's results of
operations to changes in interest rates on its debt, the Company
estimates that a 66% increase in LIBOR rates would increase its
interest expense by approximately $500,000 for the year ended
December 31, 2002. Likewise, a 66% decline in LIBOR rates would
reduce its interest expense by approximately $300,000. This
hypothetical change in LIBOR rates was calculated based on the
fluctuation in LIBOR during 2001, which was the maximum LIBOR
fluctuation in the last ten years, and as such, is not necessarily
indicative of LIBOR fluctuations that may occur during the remainder
of 2002. These estimates also assume a level of debt consistent
with the June 30, 2002 level.
INTEGRATED DEFENSE TECHNOLOGIES, INC.
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
On April 25, 2002, the Company filed a report on Form 8-K dated
April 17, 2002 to report the following items under Item 9:
-- the April 17 announcement of its earnings release date and
investor conference call for the quarter ended March 31, 2002, and
-- the April 25 announcement of its earnings results for the
quarter ended March 31, 2002
INTEGRATED DEFENSE TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
INTEGRATED DEFENSE TECHNOLOGIES, INC.
-------------------------------------------------
(Registrant)
By: /s/ Thomas J. Keenan By: /s/ John W. Wilhoite
------------------------------------- ---------------------------
Thomas J. Keenan John W. Wilhoite
President and Chief Executive Officer Vice President of Finance
(Principal Executive Officer) and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: August 13, 2002 Date: August 13, 2002
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Integrated Defense
Technologies, Inc. (the "Company") on Form 10-Q for the period
ending June 30, 2002 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), the undersigned,
Thomas J. Keenan, President and Chief Executive Officer of the
Company, and John W. Wilhoite, Vice President of Finance and
Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
Date: August 13, 2002 /s/ Thomas J. Keenan
-------------------------------------
Thomas J. Keenan
President and Chief Executive Officer
Date: August 13, 2002 /s/ John W. Wilhoite
-------------------------------------
John W. Wilhoite
Vice President of Finance and
Chief Financial Officer